To achieve its growth potential in coming years, the life settlement industry must evolve its business model to better serve a fast-growing population of recipients of long-term care funded through Medicaid, according to the keynote speaker at the conference held for life settlement institutional investors on March 11.
Alan Buerger, CEO and founder of life settlement firm Coventry, issued this assessment at the 3rd Annual Institutional Investor Life Settlement Conference, held at the Harvard Club of New York City. The event was hosted by the Life Insurance Settlement Assocation (LISA).
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“Life settlement providers must change their business model,” Buerger said. “Those that do will thrive and grow exponentially.”
Buerger applauded the industry for having transitioned from a focus of ridicule and “violent” opposition during its nascent years to one where the value of life settlements have become a “self-evident.”
That acceptance, Buerger said, is reflected in reduced life insurer-sponsored litigation and legislative initiatives aimed at curtailing the activities of the industry. The field’s maturation is mirrored, too, in a decline “in inappropriate and fraudulent acts” among industry bad actors.
Buerger added that, where once life settlement providers were the focus of lawsuits by insurers, now the tables are turning.
“We’re seeing a material increase in lawsuits where life insurance carriers now are the defendants for actions they’ve taken that relate to this market,” Buerger said, adding the industry now also faces reduced bad publicity.
“There is virtually no [newspaper] headline risk anymore, and we won’t have headline risk unless we don’t police the activities of those who act inconsistently with good business practices,” he said.
Having achieved a measure of acceptance by life insurers and industry critics, however, the life settlement industry now confronts new challenges to achieving greater growth.
One is to educate institutional investors—state and municipal pension fund managers, among others—that securitized life settlements are safe, non-correlating assets that should be included in a well-diversified portfolio allocation. That will help grow the pool of money needed to fund future settlements.
A second hurdle is to better serve life insurance policyholders of contracts with small face amounts. The life settlement industry, he noted, evolved from viatical settlements, transactions executed to serve an earlier generation of clients with small policy face amounts. Among them: AIDs patients who had a life expectancy of less than two years. Today, life settlement providers mostly serve seniors owning policies with large face amounts.
“Now it’s time to come full-circle and find ways and means, the sophistication, processes and procedures to deal with small face [amounts],” he said. “If we do that, then the large face market will come back greater than we’ve ever anticipated.”
What will force an expansion of the life settlement industry’s prospect base, he added, are the long-term care needs of an expanding population of elderly people on Medicaid. This demographic’s numbers are being fueled by an estimated 10,000 baby boomers who are retiring daily; and by an expansion of state-sponsored Medicaid programs under the 2010 Patient Protection and Affordable Care Act.
The increased liquidity needs to fund long-term care expenses of individuals eligible for Medicaid, Buerger said, comes at a time when more life insurers—Genworth, MetLife, Unum, among others—are exiting the market for the long-term care insurance.
To better serve long-term care recipients on Medicaid, Buerger envisioned the development of life settlement-funded trusts.
“Each month, money would be paid out of the trust to a nursing home that can charge the private payer rate for as long as the money lasts,” he said. “A percentage or fixed dollar amount will go to the family at the death of the insured. The state and federal government will save money [on long-term care] because Medicaid payments were delayed.
“Consumers and their families will benefit,” he added, from this industry development. Nursing home or long-term care facilities will be able to charge higher rates until the [life settlement] money runs out. And states and the federal government will pay less for Medicaid-funded long-term care.”
Buerger added that life insurers “will be forced” to accept this development, one result of which will be a growth of small face policies with cash values.
Before this brighter future can be realized, Buerger said, providers will have to bring to market streamlined, “proof-of-concept” application and underwriting procedures that ease and speed life settlement transactions. He added that more people will also be needed to interface with life settlement prospects in the low- and middle-income tax brackets.
“There will be a need for more brokers, but I don’t see insurance agents being involved in sales calls,” Buerger said. “Rather, representatives of nursing homes and long-term care facilities, as well as elder care attorneys and trade organizations that deal with the [Medicaid] population will be more active in this space.
“We [in the industry] have a very bright future,” Buerger said in closing. “We’re now in that third stage, where selling life insurance for more than would be received from a life insurer is self-evident.”